Why the recent VA circular shows the VA isn’t fooling around.

In December the VA published circular number 26-23-27, entitled “Non-Compliance in Processing Assumption”, wherein they outline the penalties moving forward for lenders and servicers who do not process the assumption in a timely fashion. See link below:


While high interest rates have made most loans attractive for assumption by the buyer, lenders and servicers have been completely unprepared for the assumption requests that have been pouring in. CFPB complaints have skyrocketed 50-fold regarding numerous failures and abuses that consumers have suffered at the hands of servicers’ unpreparedness and ineptitude.

In response to this, the VA has published a very stern warning to servicers that if they don’t clean up their act, substantial penalties and discipline will follow.

These penalties range from VA reducing the loan guaranty to zero, to an absolute ban of the lender’s ability to fund or service VA loans. I, for one, applaud this move by the VA because servicers and lenders have been very cavalier towards all of the industry stakeholders as it relates to these low interest rate assumable loans.

The cynic in me tells me that this attitude and ineptitude is intentional, as these companies would rather the low-rate loan be paid off instead of continuing, allowing them a return of their capital to shore up their battered balance sheets, or to lend out at the current 8% interest rates.

Hopefully this action compels FHA to act in a similar fashion, since FHA assumable mortgages constitute 85% of all assumable mortgages. There are almost two trillion dollars of these mortgages at an average interest rate of 3.25%, this results in hundreds of billions of dollars in interest rate savings over the remaining loan term. This benefit is far too attractive to allow servicers and lenders to foot drag or make the process so inefficient that few will complete the process, allowing those buyers the ability to benefit from the savings these loans confer. Only time will tell.